Indian stocks surged to a new record on Monday as investor optimism was bolstered by US Federal Reserve chairman Jerome Powell’s comments that the withdrawal of stimulus would be gradual. The rupee strengthened to a two-and-a-half-month high.
The BSE’s benchmark Sensex rose 1.36% to a record 56,889.76, while the National Stock Exchange’s Nifty index advanced 1.35% to 16,931.05, also an all-time high. The rupee climbed 0.6% to 73.27 a dollar, the highest since June 15.
Powell said the Fed may start paring bond purchases this year but is in no hurry to raise interest rates and will be guided by data on Covid-19 risks. However, he didn’t give a specific timeline for scaling back stimulus. Traders are awaiting US jobs data this week to assess whether the economic recovery merits early tapering.
“Powell’s overall message was quite neutral. Much of his speech on the economic outlook discussed the five different aspects of monitoring inflation, including wages, long-term inflation expectations and global disinflationary forces,” HSBC Global Research said. “While the slant on most of them was fairly dovish, he set out the dynamics that the Federal Open Market Committee (FOMC) leadership will focus on to see if their views are wrong and will need to raise rates earlier than expected.”
Analysts said the Indian markets ignored concerns of rising Covid cases amid Powell’s dovish tone and expectations of strong corporate earnings.
“We still think the committee is likely to indicate in its September statement that economic conditions have moved even closer to the “substantial further progress” standard for tapering. We still expect tapering to be formally announced in December, but the November meeting is a very close call. Even when flagging a forthcoming taper in September—opening the door to a formal announcement as soon as November—the language may stop short of committing to a specific month. It may well depend on data over the next month or two, particularly the inflation releases and the September payrolls to be released in October,” the HSBC note added.
The sharp improvement in key economic indicators, such as GST collection and auto sales, despite supply disruption, improvement in collections by microlenders and other high-frequency indicators like e-way bills, power consumption, import-export growth, indicate a sustainable rebound in earnings. This should help the market sustain the premium valuations, analysts said.
Foreign investors bought $400 million in equities in August after selling $1.7 billion in July. Year to date, they bought $7.12 billion. In August, domestic institutional investors bought ₹7,572 crore, while they bought ₹24,708 crore in 2021.
Investment bank UBS expects the tapering of bonds purchases to provide a modest headwind to equities and have a bigger impact on low-quality stocks.
In India, investors will be cautious ahead of gross domestic product data for the June quarter due on Tuesday. The data will show the impact of state-level lockdowns to stem the resurgence in covid infections. Bloomberg estimated GDP expanded 18.5% in the first quarter of fiscal 2022 from a year earlier, reflecting the low base of comparison when nationwide lockdowns were in place in 2020. However, on a quarter-on-quarter seasonally-adjusted basis, it estimated GDP contracted by 12%.
Investors will also keep a close watch on the purchasing managers’ index data and monthly auto numbers due this week.
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